Incentive effects of managerial compensations in China's state-owned enterprises

Under the framework of principal-agent theory, the paper analyzes the incentive effects and agency costs of fixed salary compensation, management responsibility system, annual salary system and stock-based compensation contracts. The former three basically cover China's main compensation mechanisms in China's state-owned enterprises since liberation. The last one is a new emerging managerial compensation in China. The paper suggests that: 1) none of the former three is suitable for China's state-owned enterprise managers. 2) Management responsibility system and annual salary system always encourage, to different degrees, managerial short-termism and incur relatively high agency costs. 3) Incentive contracts with stocks and stock options suit China's state-owned enterprises better since it may prevent managerial short-termism and induce the highest output level.